I’ve got a 4-funder right now and it’s the usual TSM/TISM/BND/REIT. I want to add just one different stock fund at 10% of portfolio. I have enough room in tax sheltered so tax efficiency of the new fund isn’t important. The horizon is at least 30 years. Right now I’m 30/30/30/10 TSM/TISM/BND/REIT.

I plan to be 25/25/30/10/10?? I’m not upping the total equity at all. Please consider current valuations, projected forward returns and diversification value (in my portfolio) when you vote. I really only want one added fund, really. So here are my options – only vanguard options. Thank you for your help.

Fine. Although I disagree. Then IF you TISM contains Emerging Markets, your most-likely best diversifier (by correlations) will be International Small Caps. Valuations also favor intl. small caps. VSS is what I use.

mhc wrote:Do your TSM and TISM have everything? For example, do they have small cap? Does TISM have emerging market?

If so, then how would adding them be adding a diversifyer?

They do, but the performance of those TSM/TISM are dominated by the large. Chart S&P 500 / TSM or FTSE Large / TISM. The large/mega caps make them (TSM/TISM) perform like large cap funds. The mid and small don't do much at market weights.

First, you should set your desired allocation in your IPS. Then, and only then, should you look for funds to achieve the desired AA.

Two of your options would give you an allocation (including your REIT as domestic equities) of 35% US equities/35% international equities (50/50). The other option would give you an allocation of 45% US equities/25% international equities (65/35). So, which is it: Do you want 50% of equity in international, or 35%?

Same idea with small cap vs. large cap. Do you want a small cap tilt? Do you want a small value tilt? Do you want a large cap emerging markets tilt?

STC wrote:Fine. Although I disagree. Then IF you TISM contains Emerging Markets, your most-likely best diversifier (by correlations) will be International Small Caps. Valuations also favor intl. small caps. VSS is what I use.

First, you should set your desired allocation in your IPS. I'm revising it now. Then, and only then, should you look for funds to achieve the desired AA The desired AA is unclear.

Two of your options would give you an allocation (including your REIT as domestic equities) of 35% US equities/35% international equities (50/50). The other option would give you an allocation of 45% US equities/25% international equities (65/35). So, which is it: Do you want 50% of equity in international, or 35%? Valuation makes 50% look better. I tend to think I'm 50% now (REIT is an asset class to me)

Same idea with small cap vs. large cap. Do you want a small cap tilt? Perhaps Do you want a small value tilt? Perhaps Do you want a large cap emerging markets tilt?Perhaps

I'm in a market timing mood, so since small-cap value has been doing great and emerging markets has not been, I would say add some small-cap emerging markets in the form of EWX or DGS. Full disclosure: I own these and everything else, too.

livesoft wrote:I'm in a market timing mood, so since small-cap value has been doing great and emerging markets has not been, I would say add some small-cap emerging markets in the form of EWX or DGS. Full disclosure: I own these and everything else, too.

I have been adding to EWX and VSS, from IJS and VTI over the last month or so.

livesoft wrote:I'm in a market timing mood, so since small-cap value has been doing great and emerging markets has not been, I would say add some small-cap emerging markets in the form of EWX or DGS. Full disclosure: I own these and everything else, too.

Emerging large isn't going to get it? If vanguard funds only: emerging or FTSE small?

I've not used ETFs, only funds and only at vanguard. I'm no genius - the userid is aspirational.

Average wrote:I’ve got a 4-funder right now and it’s the usual TSM/TISM/BND/REIT. I want to add just one different stock fund at 10% of portfolio. I have enough room in tax sheltered so tax efficiency of the new fund isn’t important. The horizon is at least 30 years. Right now I’m 30/30/30/10 TSM/TISM/BND/REIT.

I plan to be 25/25/30/10/10?? I’m not upping the total equity at all. Please consider current valuations, projected forward returns and diversification value (in my portfolio) when you vote. I really only want one added fund, really. So here are my options – only vanguard options. Thank you for your help.

Average:

You have a very sophisticated, diversified, low-cost, low-maintenance, portfolio. I think you would be wise to avoid the lure of adding more funds.

“There seems to be some perverse human characteristic that likes to make easy things difficult." -- Warren Buffett

Average wrote:I’ve got a 4-funder right now and it’s the usual TSM/TISM/BND/REIT. I want to add just one different stock fund at 10% of portfolio. I have enough room in tax sheltered so tax efficiency of the new fund isn’t important. The horizon is at least 30 years. Right now I’m 30/30/30/10 TSM/TISM/BND/REIT.

I plan to be 25/25/30/10/10?? I’m not upping the total equity at all. Please consider current valuations, projected forward returns and diversification value (in my portfolio) when you vote. I really only want one added fund, really. So here are my options – only vanguard options. Thank you for your help.

The answer is e) None of the above

All three are highly correlated with TSM and TISM, so will provide little or not Markowirz diversification benefit, i.e. lower volatility. I looked up correlations and volatility on ETFreplay

Every time I hear about an individual investor getting ready to "make changes", I get nervous. Same goes for advisors, actually. It is human nature to search out something that has performed better of late, or simply make a change based on a forecast of the future whose odds are already fully discounted into current prices.

The result of this is, investors add something after its done well, and bail on it after its done poorly and they lose conviction. In his recent book, Bogle listed two studies illustrating this.

--The first found that, over the period from 1997-2011, an average of investors in US LC, Mid, SC, and Int'l funds underperformed their holdings by -2.2% per year.
--The second looked at bad behavior by risk level, and found investors only underperform in the safest quintile of funds by -0.8%, but -3.0% in the riskiest quintile of funds.

What this tells me is, most investors buy high and sell low, and this is most pervasive amongst the options you've listed above (the most volatile asset classes).

Now, if someone resigns to educating themselves about how markets work (they're efficient), the sources of expected returns (FF 3 and 5 Factor model), and come to the conclusion that they want to diversify across multiple sources of risk/return on a permanent basis (other than altering stock/bond as one's goals diminish), then this becomes a much more logical and beneficial conversation.

Instead, if one notes that all the options listed above have trounced TSM and TISM over the last 10 years, and wants to get on that gravy-train, this ain't gonna end well.

And putting arbitrary restrictions on the number of holdings in one's portfolio serves no purpose. Beyond 1 fund, you are going to have to monitor and maintain it. Its hard to image that 4 funds is tolerable, 5 is doable, but 6 is excessive.

Finally, the technical answer is that adding US SV and Total International Small are probably the two best additions to a global equity portfolio that increases expected returns and provides additional diversification benefits. But all the caveats listed above apply in spades here.

Average wrote:I’ve got a 4-funder right now and it’s the usual TSM/TISM/BND/REIT. I want to add just one different stock fund at 10% of portfolio. I have enough room in tax sheltered so tax efficiency of the new fund isn’t important. The horizon is at least 30 years. Right now I’m 30/30/30/10 TSM/TISM/BND/REIT.

I plan to be 25/25/30/10/10?? I’m not upping the total equity at all. Please consider current valuations, projected forward returns and diversification value (in my portfolio) when you vote. I really only want one added fund, really. So here are my options – only vanguard options. Thank you for your help.

The answer is e) None of the above

All three are highly correlated with TSM and TISM, so will provide little or not Markowirz diversification benefit, i.e. lower volatility. I looked up correlations and volatility on ETFreplay

I didn't perform the calculations, but I would expect that adding any of them would have increased portfolio volatility. None of those are good diversifiers.

Really, the only thing you have listed that provides any diversification benefit is BND. The only reason to add those those funds is to increase expected risk and expected return.

There are two types of diversification an investor should consider: that which provides a short-term offsetting effect to counterbalance wild moves in other parts of the portfolio (like adding bonds to stocks). The "cost" of this decision of course is lower expected returns. So no free lunch.

The other is including separate asset classes with unique sources of expected return that may move similarly to other portfolio holdings from month to month or quarter to quarter, but over the long run may provide excess returns during a period where some other part of the portfolio has experienced a stretch of negative or zero returns (like adding global small and value to market indexes). The "cost" of this decision is you can also underperform during long periods when that same part of the portfolio is doing exceptionally well, and the specific assets themselves tend to be riskier/more volatile (although this effect is muted across the portfolio). Here is an example of this:

Rick Ferri wrote:If you're talking about the Core-4 portfolio, the answer is small-value.

Question to Rick / others... would not the correlations from etfreplay (mentioned by grayfox) suggest that VWO is the least correlated asset class, not SV? Is it because VBR is less correlated vs VXUS?

In 50/50 US/Intl portfolio, VWO still appears to be still a little less correlated with the portfolio than VBR. In Rick's core-4 portfolio which is more US-tilted, VWO would "win" even by larger margin in terms of less correlation with the portfolio...

Is there other factors to consider?

P.S. I understand the point that none of these might be very good diversifiers as some mentioned, but if OP wants to add one anyways (e.g. to increase risk/return profile of the portfolio)...

Rick Ferri wrote:Ideally, I would use a low-cost global small value index fund of ETF, but none exists. This would capture higher allocations to emerging markets, size and value premiums.

Rick Ferri

Rick, doesn't it bother you just a little that due to constantly changing advice, you and other mainstream advisors are often suggesting investment vehicles that are awfully new--or don't exist?

Plain old global funds are barely kindergarten age--they only just filed the purchase-fee burrs off Vanguard Total World Stock Index. It will be five this summer. The iShares ACWI ETF will turn five in a couple of weeks. So even global funds are new, but you want, not just global, not just global small-cap, but global small-cap value.

Vanguard FTSE All-World Ex-US Small-Cap (not global, just international, and not small-cap value, just small-cap) will turn four next month.

By the time someone does offer a low-cost global small value index fund or ETF, it won't be good enough, because they'll have discovered some new Fama-French factors by then, and all the trendsetters will be calling for a global high-apostilb lower-mid-cap fund...

Last edited by nisiprius on Tue Mar 19, 2013 12:33 pm, edited 1 time in total.

Average wrote:I’ve got a 4-funder right now and it’s the usual TSM/TISM/BND/REIT. I want to add just one different stock fund at 10% of portfolio. I have enough room in tax sheltered so tax efficiency of the new fund isn’t important. The horizon is at least 30 years. Right now I’m 30/30/30/10 TSM/TISM/BND/REIT.

I plan to be 25/25/30/10/10?? I’m not upping the total equity at all. Please consider current valuations, projected forward returns and diversification value (in my portfolio) when you vote. I really only want one added fund, really. So here are my options – only vanguard options. Thank you for your help.

The answer is e) None of the above

All three are highly correlated with TSM and TISM, so will provide little or not Markowirz diversification benefit, i.e. lower volatility. I looked up correlations and volatility on ETFreplay

STC wrote:
Correlations during a global economic crisis only prove correlations during a global economic crisis.

Those are rolling 120-day correlation since about the start of the ETFs. It depends on the ETF.

For example, correlation VTI-VWO is from Aug 23, 2005 to Mar 18 2013.
So the chart is from severals years before to several years after the 2008-2009 crisis.
It ranged from .65 to .94 which is moderately high to high.

You will never see low correlation between VTI-VWO as long a stock markets are global. Stocks are just not good diversifiers, in the Markowitz sense, for other stocks.

STC wrote:
Correlations during a global economic crisis only prove correlations during a global economic crisis.

Those are rolling 120-day correlation since about the start of the funds. It depends on the fund.

For example, correlation VTI-VWO is from Aug 23, 2005 to Mar 18 2013.
So the chart is from severals years before to several years after the 2008-2009 crisis.
It ranged from .65 to .94 which is moderately high to high.

You will never see low correlation between VTI-VWO as long a stock markets are global.

You will also never see the high's of these correlation ranges as long as we are not in a global crisis. Further, periods of 5 years is not enough of a sample to draw any conclusion from - except that we likely have experienced the height of global correlations during that period.

STC wrote:
You will also never see the high's of these correlation ranges as long as we are not in a global crisis. Further, periods of 5 years is not enough of a sample to draw any conclusion from - except that we likely have experienced the height of global correlations during that period.

But I ran the numbers from Jan-1999 to Dec-2012 which is 13 years and there was no diversification benefit. (See past post)
The correlation of monthly returns of VTSMX-VEIEX over that period was 0.84722, which is high correlation.

Rick Ferri wrote:Ideally, I would use a low-cost global small value index fund of ETF, but none exists. This would capture higher allocations to emerging markets, size and value premiums.

Rick Ferri

Rick, doesn't it bother you just a little that due to constantly changing advice, you and other mainstream advisors are often suggesting investment vehicles that are awfully new--or don't exist?

For years, all of my recommendations have been total market Vanguard funds with a tilt to small-cap value. The tilt has been with DFA and ETFs, but you can do it with Vanguard. The idea of a global small-cap value fund simply consolidates US SV and Int'l SV. That isn't radical, IMO. It's just cheaper and more efficient.

Rick Ferri

The views expressed by Rick Ferri are strictly his own as a private investor and author and do not reflect the views of any entity or other persons.

Rick Ferri wrote:Ideally, I would use a low-cost global small value index fund of ETF, but none exists. This would capture higher allocations to emerging markets, size and value premiums.

Rick Ferri

Rick, doesn't it bother you just a little that due to constantly changing advice, you and other mainstream advisors are often suggesting investment vehicles that are awfully new--or don't exist?

Plain old global funds are barely kindergarten age--they only just filed the purchase-fee burrs off Vanguard Total World Stock Index. It will be five this summer. The iShares ACWI ETF will turn five in a couple of weeks. So even global funds are new, but you want, not just global, not just global small-cap, but global small-cap value.

Vanguard FTSE All-World Ex-US Small-Cap (not global, just international, and not small-cap value, just small-cap) will turn four next month.

By the time someone does offer a low-cost global small value index fund or ETF, it won't be good enough, because they'll have discovered some new Fama-French factors by then, and all the trendsetters will be calling for a global high-apostilb mid-cap fund...

Nisiprius,

I don't always agree with you, but I couldn't have said this better myself. Welcome to my industry.

If you (advisor or individual investor) don't think there are currently enough existing options to get the job done, you never will. More is lost hopping from this fund to that fund or that ETF than any drawbacks associated with existing funds.

I can promise you that the vast majority of DIY investors underperform the simple 3 fund portfolio regardless of whether or not they tilt, use REITs, or anything else.

As for all these passive advisors, even the "low cost" ones, it's even worse with their tinkering of individual securities here and there, adding alternatives, taking big bond risks, fundamental indexing, the latest/greatest ETFs, switching from this fund to that one, etc. -- I've looked at their model portfolios going back 15 years or so...you know what? Not a single one I can find has earned higher risk-adjusted returns than the simple cookie-cutter DFA Balanced Strategies (100/0 80/20, 60/40...0/100) that all these pros like to goof on as being so "old school" or "DFA kool-aid" or whatever. A lot of them trail the 3F mix too.

Same thing with the "consultants" charging millions of dollars to pensions and the high priced endowment managers. 80%+ underperform the 3F, probably 99% underperform the DFA Balanced Strategies.

There was an article in the WSJ last week about a manager overseeing a FLA pension plan whose returns they perceived to be so good, he was dubbed the "Oracle of Tampa". Not "good manager", not "outstanding manager", but "Oracle"! Do you know what the definition of Oracle is?

A priest or priestess acting as a medium through whom advice or prophecy was sought from the gods in classical antiquity.

If I was channeling advice from God, I would sure hope I would have got the message to be in EM from 2003-2007, LT Treasuries in 2008, EM again in 2009, SV in 2010, back to LT Treasuries in 2011, and SV since, for a +36% annualized return from 2003-2012.

Know what the manager dubbed the Oracle of Tampa did over this period? +9.5%. Know what an 80/20 version of the 3F portfolio did? +8.3%. +1.2% over the 3F portfolio (with greater risk) gets you anointed an "Oracle"! The DFA Aggressive Balanced (80/20) mix did +10.1%, even though it's bond allocation was painfully short and out of step with collapsing interest rates.

To your original comment, we've been at "good enough" for at least 10 years now, longer depending on your allocation and what you have access to.

[Response to inappropriate comments removed by admin LadyGeek] I have repeatedly said that the correct way to manage a fund portfolio is with the right product for each asset class. That's why I have ALWAYS used a combination of open-end index funds, ETFs, DFA funds, and have at times used actively managed funds. My reseach into ETFs is only one part of much larger process.

Rick Ferri

The views expressed by Rick Ferri are strictly his own as a private investor and author and do not reflect the views of any entity or other persons.

STC wrote:
You will also never see the high's of these correlation ranges as long as we are not in a global crisis. Further, periods of 5 years is not enough of a sample to draw any conclusion from - except that we likely have experienced the height of global correlations during that period.

But I ran the numbers from Jan-1999 to Dec-2012 which is 13 years and there was no diversification benefit. (See past post)
The correlation of monthly returns of VTSMX-VEIEX over that period was 0.84722, which is high correlation.

So by extension, I assume you do not own any Intl Stock? After all the correlation's you are telling me are meaningless are in fact better then between VTI-VEU.

If you rebalance once a year, if that often, that is not an issue. Are we talking 15 or 20 minutes once a year vs. 10 minutes once a year? I personally love the symmetry and am voiding commodities and going to a 12% and 8% split both domestic total/small and international total/small early April. I'm waiting for the quarter to close so I can get more current M* annual distribution statistics for budget planning, tax planning and draw downs (I'm retired).

mhc wrote:Do your TSM and TISM have everything? For example, do they have small cap? Does TISM have emerging market?

If so, then how would adding them be adding a diversifyer?

They do, but the performance of those TSM/TISM are dominated by the large. Chart S&P 500 / TSM or FTSE Large / TISM. The large/mega caps make them (TSM/TISM) perform like large cap funds. The mid and small don't do much at market weights.

It's up to each advisor to choose which vehicles they believe are best in each asset class -- we're all held to the same fiduciary standard and put client interests first. You act like there is one standard for you, then everyone else's which is inferior. My CFA charter is from the same institute as yours.

One thing I do know: there is no extra credit or additional "diversification" potential from using multiple fund families or types of investments. You don't get a return bonus for using ETFs and index funds and active funds, although from a marketing standpoint maybe it would make one look more "independent", but of course that's baloney.

I know this much, I've seen too many advisors try that "I'm so independent" nonsense, and it ends up costing returns to clients because its all just performance chasing and they wind up jumping on a horse that is under-diversified, or based on nonsensical simulated backtesting and completely devoid of any logical economic principles, or just based on a few years of random good tracking error. And it's never disclosed to new prospective clients, they trot out the latest recommendations and are left to believe those have been in place the entire time.

Lets just say someone started 2003 with the 2500 stock DFA Micro fund as their SC position. Then, because the 500 stock Bridgeway Ultra Small did so much better, we hop on that wagon in 2004, only to determine in 2011 that (after horrendous relative performance) micro cap isn't really necessary -- we'll just plow that into the 400 stock S&P 600 Value for 2012.

Well, here are the 10 year returns of each of those funds (2003-2012), and the tactical small cap strategy I describe above:

That's -2.2% per year underperformance relative to just sticking with DFA Micro and all its flaws. As a matter of fact, just sticking with any of them for the whole period worked better. That return was actually only 0.5% higher than TSM, one would probably have been better off with the 3F portfolio the whole time....to my point above.

This gets back to a point I made earlier in this thread -- professional or DIYer, assuming you have a reasonable plan, you are better off just sticking with it and not tweeking/upgrading it all the time. It almost never works out well.

STC wrote:
So by extension, I assume you do not own any Intl Stock? After all the correlation's you are telling me are meaningless are in fact better then between VTI-VEU.

Where did you get that idea? And who said the correlations are meaningless?
I'm weighted more in international, including emerging markets, than in U.S. stock.

What I said was that adding VWO, VSS or VBR to TSM/TISM doesn't provide any diversification benefit, in the Markowitz sense. Adding them increases, rather than decreases, portfolio volatility. That's what the numbers show. Also adding TISM to TSM doesn't provide that Markowitz diversification benefit, either.

I have always said that ETFs are simply a pipeline for investment management. They are a form a distribution that can be more tax-efficient and lower cost that traditional open-end funds, but not always. I have written extensively that ETFs work better in some asset classes (equites) than others (bonds). This has been my position for 15 years and it has not changed.

I removed a few posts containing inappropriate comments, some continuity is lost. See: Forum Policy

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We seem to be getting off-topic. The OP is asking for a recommendation to diversify his portfolio and is focusing on Vanguard.

To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

It's up to each advisor to choose which vehicles they believe are best in each asset class --

Eric

Eric,

Take a look at the following referenced portfolio. It appeared in the May 4th, 2009 edition of the WSJ. The column asks prominent advisors for a model portfolio. Greater than 50% of the funds in Rick’s published portfolio were mutual funds including two DFA funds. I and many of my colleagues invest using the same funds and I updated it by selling BRSIX and put the proceeds into IJS when Rick made the switch. I believe Rick divided his clients BRSIX between VTI and IJS. Anyways, I receive a monthly performance report benchmarked against DFA model portfolios. My portfolio has outperformed ALL DFA models from 20% equity to 100% equity. That is, my blue portfolio line has overtaken ALL other DFA colored lines on the performance graph and is pulling away. Conclusion? Investors do not need DFA to be successful.

Am I a jerk if I suggest further reading and research? Moving slower [or not at all in many cases] in changing the portfolio is generally recommended [unless you have a train wreck, which you do not] and having a clear understanding of what you need and how to attempt to get there tends to answer many of the AA questions. You may end up with exactly what you have now, or a full-blown S&D set-up, or an even more conservative version of one of the two or something in between. Either way you won't be worse off for the added education.

Take a look at the following referenced portfolio. It appeared in the May 4th, 2009 edition of the WSJ. The column asks prominent advisors for a model portfolio. Greater than 50% of the funds in Rick’s published portfolio were mutual funds including two DFA funds. I and many of my colleagues invest using the same funds and I updated it by selling BRSIX and put the proceeds into IJS when Rick made the switch. I believe Rick divided his clients BRSIX between VTI and IJS. Anyways, I receive a monthly performance report benchmarked against DFA model portfolios. My portfolio has outperformed ALL DFA models from 20% equity to 100% equity. That is, my blue portfolio line has overtaken ALL other DFA colored lines on the performance graph and is pulling away. Conclusion? Investors do not need DFA to be successful.

I never said one needed DFA funds to be successful. It sure helps, but isn't necessary. My point was that over thinking/over tweeking portfolios almost never ends up well, and often the simplest allocations, or those that have been around the longest and aren't subject to constant revisions usually outperform those that constantly add the flavor of the month.

As for your advisor providing you benchmarked performance figures relative to "DFA models", on a monthly basis no less, that is the strangest thing I have ever heard. DFA funds are good, but I've never heard them being used as benchmarks.

Anyway, I took a look at the funds/allocations you provided in the link, and here is what I found over the last 10 years through Feb 2013:

1) an all-equity version of that mix earned +10.9%, the traditional Equity Balanced Strategy earned +12.2%.
2) a 75/25 version of that mix earned +10.0% but had more risk than a traditional equity/ST bond mix of 75/25, so simply adjusting to 80/20, the Aggressive Balanced Strategy gets us to the same risk and here we see a return of +10.9% -- or the same return as the all-equity version in your link with less risk.
3) the 50/50 version shown earned +8.9% but has a lot more risk than a traditional equity/ST bond mix of 50/50, so simply adjusting to 60/40, the Normal Balanced Strategy gets us to the same risk and here we see a return of +9.3%

So a deficit of somewhere between 1.3% and 0.4% (I ignored the cost/underperformance of switching small cap funds several times mentioned above) compared to the simple balanced strategies, or similar returns for far less risk, depending on the comparison. Not too shabby, especially given the anomalous period of falling rates and one-time benefit to portfolios with longer-term bonds.

Both approaches are fine, and I'd wager a large sum that either, left untweeked, will outperform a version that adds the latest/greatest fund or asset class.

1) Your analysis would show a different result if you used the past 5 years rather than a 10 year period. It isn't surprising that a back-tested "Traditional DFA Equity Balanced Strategy" (whatever that means) outperformed the more TSM mix I used over the specific 10 year period because the DFA strategy had a significantly higher allocation to value stocks and small caps. Since we all know that value stocks and small cap crushed large cap stocks in the first half of the 10 year period, it is logical that ANY portfolio that was more heavily weighted to value and small cap would have outperformed my mix. An investor didn't need to be in DFA funds to do that. Nonetheless, the return of my mix was good as you reported.

2) I'll also add that my client's actually received this good return less a small adviser fee. You can quote with 20/20 hindsight an all DFA fund return if you wish, that is until someone questions if you actually invested money this way 10 years ago and if any client of yours actually received the return you're putting up net of all fees including your own. Where there was no adviser firm, there can be no portfolio return, and any 10-year return number presented by an adviser is hypothetical, which has no more value than the paper it's printed on.

Rick Ferri

The views expressed by Rick Ferri are strictly his own as a private investor and author and do not reflect the views of any entity or other persons.

1) Your analysis would show a different result if you used the past 5 years rather than a 10 year period. It isn't surprising that a back-tested "Traditional DFA Equity Balanced Strategy" (whatever that means) outperformed the more TSM mix I used over the specific 10 year period because the DFA strategy had a significantly higher allocation to value stocks and small caps. Since we all know that value stocks and small cap crushed large cap stocks in the first half of the 10 year period, it is logical that ANY portfolio that was more heavily weighted to value and small cap would have outperformed my mix. An investor didn't need to be in DFA funds to do that. Nonetheless, the return of my mix was good as you reported.

2) I'll also add that my client's actually received this good return. You can quote a 20/20 hindsight return if you wish until someone questions if you firm actually invested money this way 10 years ago and clients received this return. Where there was no adviser firm, there can be no portfolio return, and any 10-year return numbers presented by that adviser have no more value than the paper they're written on.

Rick Ferri

Rick,

The last 10 years includes the last 5 years. Why would you ignore a longer period to focus on a shorter period? The last 10 years haven't been anomalous for market/size/or value premiums compared to historical averages. So all tilted equity portfolios would have behaved about as expected based simply on history. The only thing far out of line in the last 10 years was the return on long-term bonds over short term bonds (about +3X its historical average), and that was my point -- balanced portfolios without the benefit of hindsight will still do fine even if a segment of the allocation is out of step with short-term market tendencies.

And this conforms with prevailing wisdom on portfolio construction -- leaving return on the table in terms of avoiding long-term bonds can be more than made up for by holding more small/value on the equity side, or more equities vs. fixed depending on the risk/return objective. Even during a period of only modest equity premiums, and bond premiums triple their long-term average, you come out ahead "taking risk in equities".

And, you are right, I never said you need DFA to invest this way. I just showed the returns you would have gotten if you did, as a lot of people did. I intentionally used these allocations because they aren't backfilled in anyway and aren't how I invest $, so this isn't about "me". These generic allocations have been around for 2 decades or so (with additions for EM value/small as the only changes since early 1990s), here is an article from Booth in 2000 that lists the allocations: http://www.seiler-associates.com/downlo ... xFunds.pdf.

My whole point was, one need not constantly tweak allocations or make portfolio updates based on new-era thinking. These 2 decade-old allocations work just as well as one could possibly hope. I could have just as easily reported 20% Vanguard 500, 20% Vanguard Value Index, 10% Vanguard Small, 10% Vanguard Small Value, 10% Vanguard REIT, !0% Vanguard Int'l Value, 10% Vanguard Int'l Explorer, 10% Vanguard EM Index diluted with 20%, 40%, 60%, or 80% Vanguard ST Bond Index and been within 1-2% of stated returns.

I don't have anything more to add here, this has gone way past a worthwhile conversation. I've tried to make my point, obviously not as successful as hoped.

EDN wrote:The last 10 years includes the last 5 years. Why would you ignore a longer period to focus on a shorter period?

Well because it LOOKS bad for the strategy, that's why! If the past 5-years looks bad, you go back 10, if 10 looks bad, you go back 20, if 20 looks bad, you go back further. Eventually you will find a period where your strategy wins!

I often laugh at mutual fund ads the keep stretching further and further back until they hit a period where the fund can report outperforming the market. I think the furthest back I've seen is 45 years. If you invested in this fund for 45 years, from the beginning til today, you would have beat the S&P 500. Touche!

You're correct in that there is nothing more to discuss on this issue.

Rick Ferri

The views expressed by Rick Ferri are strictly his own as a private investor and author and do not reflect the views of any entity or other persons.